Crude Oil Looks Weak

By: Seven_Days_Ahead

The Oil market, for so long considered a one way bet for the bulls and potentially ruinous for western economies, no longer looks so sure-footed.

FUNDAMENTALS:

The Oil market, for so long considered a one way bet for the bulls and potentially ruinous for western economies, no longer looks so sure-footed.

As the developed economies moved out of recession and the economies of China, India etc., continued to expand apace, the argument went that oil prices could only go one way. New oil reserve discoveries were deemed as not keeping pace with demand coming from the fast-growing and emerging economies. And as ever, OPEC made little effort to restrain the price by increasing output, as they sought to cash in on the bonanza.

Things have changed.

The Eurozone sovereign debt crisis remains unresolved, despite several bailouts. The crisis has spread to Italy and France, and though not with the same intensity that engulfed Portugal, Ireland and Greece, it has still forced both Italy and France to rush through austerity measures in an attempt to placate the markets.

But growth in the Euro zone, seen for so long as Teflon-coated, has at last begun to wilt under the strain with German Q2 GDP released earlier this week especially disappointing.

In the US, a self-inflicted default was avoided, and a deficit reduction plan adopted. But the AAA rating was lost, at least on S&P’s measure. The focus now is the underlying health of the US economy.

Recession has emerged as the main fear, now that the debt ceiling issue has been dealt with.

Although the US economy recorded growth in Q2, it was seen as very weak. The labour market continues to cause concern despite an improved Non-Farm Payroll report in August, but the housing market has yet to stage anything that resembles a convincing recovery.

If the US economy can not shake off its current malaise, or worse still, slips into recession, and the Euro zone cannot find the political cohesion to resolve the debt crisis, a period of economic under performance, or outright recession looks likely.

Global equity markets sense this and have been selling off over recent weeks, but of greater interest to us, is oil.

If the developed economies of the US, Euro zone and UK fall into recession, oil demand will weaken. The oil price over recent weeks has begun to price that in, but has it gone far enough?

We judge the oil price could fall further in the current environment:

•Equity markets are selling off hard as we write, and traders are registering their expectation of a new recession.

Watch the price action in this market as oil traders’ economic expectations catch up with reality.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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